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Why Investing in Gold Isn’t a Sound Strategy

Solid gold bars

6 Reasons to Reconsider an Investment in Gold

If you’ve watched any financial TV shows, you’ve likely seen a commercial for gold. Gold brokers often use the fear of political unrest, high inflation and rising deficits to persuade people to purchase gold. While it may be tempting, it seldom makes sense to buy gold as an alternative to investing in a diversified portfolio of stocks, bonds and other types of investments. Following are six reasons why investing in gold isn’t a sound strategy.

#1 – The value of gold is driven by emotion.

When investment analysts consider investing in a particular stock or bond, they typically spend a lot of time looking at the issuer’s past investment performance and fundamentals. They use a variety of metrics to help gauge the investment’s potential for future earnings. For example, when evaluating a stock, analysts typically look for a strong price-to-earnings ratio, price-to-book value, price-to-enterprise value, etc.

Gold doesn’t have earnings, so none of these metrics apply. Instead of gold’s value being driven by strong earnings, performance and fundamentals, it’s driven by investor emotion. When people fear market volatility, they tend to flock to gold, believing it will protect their assets from a downturn. However, as we’ve written many times, investor fear almost always leads to poor investment decisions.

Selling out of equities or bonds at a loss to purchase gold can result in permanent losses. If you’re no longer invested in the market, you miss out on the opportunity to buy shares at a lower cost during a downturn, and you also miss out on the benefit of any future market rebounds.

#2 – The value of gold fluctuates more than many people realize.

Some people think of gold like investing in a Treasury bond or money market fund; however, gold is subject much higher price fluctuations than these more stable investments. Consider the following chart, which compares the investment returns of various market indices. Gold is included in the precious metals category.

Click here for an interactive version of the table above.

Gold’s volatility is especially apparent between 2015 and 2016. Notice in 2015 that precious metals had a -39.43% return, versus a 56.29% return in 2016. As you can see from its position on the chart, the precious metals category was more volatile than any other asset class during that time period.

Across the entire 10-year period, precious metals fluctuated significantly between high and low performers, as indicated by their position at both the top and bottom of the chart. In contrast, take a look at the large cap stocks category, which performed relatively consistently between 2014 and 2024.

#3 – Gold isn’t a good hedge against inflation.

Contrary to what some people believe, the price of gold typically doesn’t track inflation. Consider the following.

Notice, specifically, the three-year returns of gold versus the S&P 500 Index. Annual inflation hit 4.7% in 2021 and 8.0% in 2022. However, instead of protecting against inflation, gold generated a negative annual real return. Those who remained invested in stocks would have fared much better, as the S&P 500 returned 8.1% during the same period.

#4 – Gold doesn’t provide dividends or income.

There are no ongoing benefits to holding gold. In contrast to investments that provide a current yield, such as certain stocks, bonds, real estate, etc., you only receive a return on your investment when you sell gold for more than you purchased it for. This is especially important to understand if you rely on a steady income stream to support your lifestyle.

#5 – Gold is expensive to maintain.

In contrast to stocks, bonds, CDs, etc., gold is a physical asset that must be stored and protected. If you purchase physical gold, you’ll need to pay to keep it in a safe location — and you’ll also need to insure it against damage or theft. These costs can add up to a significant amount.

You can lower your expenses by purchasing gold mining stocks and/or gold-backed paper assets; however, even these investments are subject to broker fees when bought and sold.

#6 – Physical gold is subject to higher capital gains tax rates.

Long-term capital gains tax rates for market-traded investments range from 0% to 20% in 2024. However, long-term capital gains tax on physical gold is based on your marginal tax rate, up to a maximum of 28%. That means if you fall into the 33%, 35% or 39.6% tax brackets, you’ll be subject to a 28% long-term capital gains tax on any physical gold you sell.

What’s a better alternative to gold?

Given the downsides of investing in gold, where’s an investor to turn for inflation protection, income and security? At Creative Planning, we believe the best option is to invest in a diversified portfolio that’s in line with your long-term objectives, investment time horizon, risk tolerance and future goals. That’s why we help clients establish custom investment allocations to meet their needs and navigate the specific challenges they face.

Could you use help developing a custom investment portfolio to meet your needs? Schedule a call with a member of our team. We look forward to getting to know you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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